By Thomas Reynolds, Jessica Smith, Jennifer
Edwards and James Sikorski
Agenda
Introduction
 Industry Structure

 Background
 Competition/Organization

Company Overviews and Ad Strategies
 AT&T
 Verizon
 Sprint
Raw Data Analysis
 Recommendations and Investment Analysis

Why This Industry?

Highly concentrated
 Barriers to entry
 Verizon Wireless, AT&T, Sprint
 Increase in M&A activity
Large advertising expenditure budget
 Comprehensive branding strategies

The Background, Competition and Organization
of the Industry
Background – Industry Definition
 “This Industry operates and maintains
transmission facilities to provide direct
communication through radio-based
cellular networks. Industry services
include cellular mobile phone services,
broadband personal communication
services and wireless public safety
services.”
Background – Snapshot

Key Drivers
 # of mobile
internet
connections
 % of services
conducted
online
 Number of
employees
 Price of
electronic
components
Background – Technological
History
1G
2G
3G
4G
•Introduced in the 1980s
•Brick-sized analog phones
•One-dimensional (Voice only)
•Obsolete in 2008
•Digitally-encrypted networks
•Global System for Mobile Communications (GSM)
•Code Division Multiple Access (CDMA)
•Enabled use of SMS and email
•Still used in developing countries
•Industry Standard
•Increased speed of internet browsing, picture and video messaging, and handheld GPS use
•Data transmission speeds between 300 – 600 kbps
•Fully IP-based system, much like modern computer networks
•Data transmission speeds up to 100 mbps
•Long Term Evolution (LTE)
•Mobile WiMAX
Background – Technologies
Offered
Cellular voice
services
Multimedia
messaging services
(MMS)
Short message
services (SMS)
Advanced Personal
Communications Services (PCS)
• all-in-one wireless phone
• data service
Background – End Markets

Major Market
Segmentation
(% of Total Revenues)
Corporate Clients
15%
55%
30%

Small and Medium
Businesses
Consumer and
Residential Clients

Corporate Clients (15%)
 Predictable long-term usage
patterns (stable market share)
 4G cloud-capabilities could increase
corporate share of revenues
 Key to service: Speed & Data
Small and Medium Businesses (30%)
 Eroded market share due to strong
uptake of smartphones within
consumer segment
 Emphasis on cell phone tethering
combining greater value with greater
convenience
General Consumers (55%)
 Price, service reliability, and nextgen applications are crucial
 Data-intensive content on 4G
network will cause a spike in
demand
Background – Supply Chain

Computer Manufacturing
Industry

Supplies motherboards and
graphics cards
 Supplied by semiconductor and
circuit manufacturing industry
Wired
Telecommunications
Carriers
Telecommunication
Networking
Equipment
Manufacturing
Computer
Manufacturing



Wireless
Service
Wired Telecommunications
Carriers
Providing internet access and
video services
Telecommunication Networking
Equipment Manufacturing

Supplies telephone switching
systems, data bridges, routers
and modems
 Increased emphasis on internet
protocol-based
telecommunication
Background – Production Costs
Capital Intensive
 $1.86 is spent on
capital for every $1
spent on labor
 >$100 billion spent on
expanding the
capacity of wireless
networks in past 5
years

 Upgrading 3G
infrastructure
 Rollout of 4G network
Competition

Major Players




Verizon Wireless
AT&T Inc.
Sprint Nextel Corporation
Deutsche Telekom (T-Mobile wireless services
segment)
 Small regional wireless carriers
○ Usually acquired by the major players
 Alltell by Verizon (2009)
 MetroPCS by T-Mobile (2013)
 Leap Wireless is expected to be another acquisition
target
Relative Market Share
(Revenue $)
Deutsche Other, 8.8%
Telekom AG,
9.6%
Sprint Nextel
Corporation,
14.1%
Verizon Wireless,
36.0%
AT&T Inc., 31.5%
Concentration Ratios

Herfindahl-Hirschman Index

Competitive market
○

>1,000
Provider
1,000 – 1,800
Highly concentrated market
○

Four-Firm Concentration
Ratio
Moderately concentrated market
○


Market Share
Verizon Wireless
36.0%
AT&T Inc.
31.5%
Sprint Nextel Corporation
14.1%
>1,800
Antitrust concerns
Provider
Market
Share
Squared Market
Share
Verizon Wireless
0.360
0.1296
AT&T Inc.
Sprint Nextel
Corporation
0.315
0.0992
0.141
0.0199
Deutsche Telekom AG
0.096
0.0092
0.2579
Herfindahl-Hirschman
Index
2579.220
Deutsche Telekom AG
Four Firm Concentration Ratio
9.6%
91.2%
Mergers & Acquisitions Activity
March 2011
August 2011
October 2012
April 2013
• AT&T makes $39B
tender offer for TMobile
• Tentatively add
33.7M subscribers
to AT&T’s
customer base
• The Antitrust
Division of the
United States
Department of
Justice blocked the
takeover
• SoftBank makes
$20B tender offer to
acquire 70% stake
in Sprint
• Dish Network
makes $25.5B
tender offer to
acquire Sprint
• Give DISH the
largest portfolio of
spectrum availability
Competition

Economies
of Scale
Regulations
on # of
market
participants
Barriers
to Entry
Entry is very
difficult
○ High costs
Spectrum
Availability
associated with
building base
stations, towers and
other network
infrastructure
○ Regulatory limits on
the number of
participants in each
market
 i.e. finite # of firms
Saturated
Subscriber
Growth
can operate PCS
services
○ Re-allocating rather
than creating
demand
Competition – Degree of Rivalry

Churn Rate: # of customers a firm loses on a
monthly basis
 Roughly 1.5% - 3.5% of customer base
 Combative

Service
 Quality
 Geographical coverage
 Customer service

Product Innovation
 Boosts use
 Increases margins
 Attracts new customers
Competition – Service Differentiation
Verizon Wireless
AT&T Inc.
Sprint
T-Mobile
2GB Individual Plan
$100.00
$100.00
$109.00
$79.99
4GB Share Plan
$230.00
$230.00
$469.96
$219.98
Price Per Additional Smartphone
$40.00
$45.00
$99.99
$30.00
Price Per Additional Basic Phone
$30.00
$9.99
$9.99
$30.00
Monthly Price Per Tablet
$10.00
$10.00
$10.00
$49.99
Unlimited Prepaid Plan
$50.00
$50.00
Not Available
$50.00
Contract-based
x
x
x
x
Prepaid
x
x
Maximum Phones on Plan
10
10
5
5
Maximum Contract Length (Years)
2
2
2
2
Days to Return Phone
14
14
14
14
Number of States
50
50
50
50
Coverage Score
90%
90%
95%
70%
Rural Coverage Score
90%
85%
95%
70%
Early Termination Fee
$350.00
$325.00
$350.00
$200.00
Activation Fee
$35.00
$36.00
$36.00
$35.00
Data Overage Fee
$15.00
$15.00
Varies
None
Roaming Charges
Varies
None
None
None
100%
85%
95%
90%
Pricing Comparison
Type of Carrier
x
Plans
Coverage
Fees
Help & Support
Help & Support Score
Competition - Regulations

Federal Communication Commission (FCC)
 Telecommunications Act of 1996
○ Do not regulate unless there is evidence that the
market is being abused “to the detriment of the
consumer and cannot be corrected outside of the
regulatory process.”
 Capped limits on the amount of spectrum
○ 45 MHz in urban markets
○ 55 MHz in rural markets
○ Dictates the # of service providers in a region (4-8)
 Monitors auctions of wireless “real estate”
○ 700 MHz band auction bidding war between Verizon &
AT&T (2008)
○ Spent a combined $16.2 billion to build out LTE
infrastructure
Regulations

Proposal by the Federal Communication
Commission
 Transparent phone bills

Network Neutrality Debate
 ISP’s and telecommunications providers
 Attempting to prevent extra costs for
emerging services that require increased
bandwidth
○ Video streaming
○ LTE
Industry Organization (Geographic)
•
•
Geographic spread of this industry correlates
closely with population density across the nation
Industry Establishment breakdown
•
Southeast: 28.5% and falling due to over service
•
West: 15.6%
•
•
•
•
Great Lakes: 13.8%
•
•
Highest mobile penetration
Most mature market
But consolidating after economic crisis
Poorest region
Mid-Atlantic: 13.7%
•
•
Affluent region high subscriber density
But decreasing population
Industry Organization (Geographic)
AT&T
 Advertising expenditures •
Total Advertising Spending (2012)
Largest advertising
budget in the
industry.
• Market share: 31.5%
• Second largest
wireless
telecommunications
provider in the United
States.
• 106.96 million
subscribers.
“Your World. Delivered.” &
“Cingular is now the new AT&T.”
(2006)



Launched in 2006 via
electronic, print, and online
media.
Utilized informative
techniques to make the public
aware of the recent merger
between AT&T and Cingular.
An important re-branding
campaign that carefully
transitioned the Cingular
brand to AT&T in advertising
and customer
communications.
“Rethink Possible” (2010)
Sought to move away
from the fierce, combative
ad competition with
Verizon.
 A highly conceptual
campaign that focused on
innovation and portraying
AT&T as a “lifestyle
company”.
 Persuasive tactics used to
differentiate and polish
AT&T’s image.
 No emphasis on selling
particular services or
products.

“It’s not complicated.” (2012)
“It’s not complicated.” (2012)
Campaign uses humor as a persuasive
tactic to push across simple ideas such
as a fast network is better and versatility
is better.
 Doesn’t really demonstrate why AT&T is
the best network to choose.
 Was a major hit on social media but
failed to increase sales or subscriptions.

Google Trends- AT&T
Very little search activity prior to 2007.
 The spikes in search activity seem to be
correlated with the release of the various
iPhone models.

Google Trends- Cingular

Dramatic decrease in search activity postmerger with AT&T.
Verizon

Advertising Expenditures
(Total Advertising Spending 2012)
• Second largest
advertising budget
in the industry.
• Market share:
36%
• Largest wireless
telecommunicatio
ns provider in the
United States.
• 115.78 million
subscribers.
“Can you hear me now?” & “We never
stop working for you.” (2002)


A massive TV campaign
that utilized persuasive
advertising to increase
Verizon’s perceived
network reliability.
It also helped move
network reliability up the
ranks as a key purchase
consideration for
wireless users at a time
when other companies
where emphasizing price
and minutes.
“Don’t be afraid of dead zones.” (2008)
• Multi-media campaign
that makes subtle use of
combative advertising.
• Pokes fun at AT&T’s
“dead zones”.
• Reassures customers that
Verizon’s network is
superior.
• Consistent with the
messages of previous
advertising campaigns–
Verizon has the best
network (emphasis on
coverage).
“Rule the Air.” (2010)


Persuasive ad campaign
that was organized in
response to AT&T’s
“Rethink Possible”
campaign.
“It’s a new brand campaign.
It’s just meant to describe
how our network empowers
our customers. The ‘Can
you hear me now’ campaign
was meant to emphasize
the company’s network
strengths. This is an
evolution of that message,
but it speaks more to how
customers use their wireless
service.” –Verizon
spokeswoman Brenda
Raney
Google Trends- Verizon
Search activity has remained at a high,
steady level throughout the years.
 Much less volatility than AT&T.

Combative and Comparative advertising strategies in the
AT&T/Verizon rivalry.
“There’s a map for that.” (Verizon 2010)
• Comparative advertising campaign aimed at highlighting major
differences in 3G network coverage (targeted at AT&T iPhone users).
• The expiration of AT&T’s contract with Apple as the exclusive carrier
of the iPhone created a huge opportunity for Verizon (up to 6.5 million
subscribers could defect from AT&T).
AT&T’s Response
“Yes, I can hear you now.” (Verizon 2011)
• This ad campaign was
combative rather than
comparative.
• Focused on attacking the
competition instead of
comparing coverage, data
speeds, etc.
• Although AT&T isn’t
specifically mentioned,
Verizon clearly insulted
the reliability of AT&T’s
network.
AT&T’s Response
Did it have an effect?
iPhone activations from Q4 of 2010 – Q2 of 2012
Number of iPhone activations (millions)
8
7
6
5
4
AT&T
3
Verizon
2
1
0
2010 Q4
2011 Q1
2011 Q2
2011 Q3
Time
2011 Q4
2012 Q1
2012 Q2
Company Overview
# 3 Wireless Carrier in US
 Serves over 55 million customers
 Market Share: 14.1%
 Merged with Nextel Communications in
2005
 Prepaid mobile access subsidiaries
 Planned acquisition of Clearwater

 5th largest service provider in the U.S.
 11 million current subscribers
Advertising Spend
Spent $1.4 Billion in 2011
 Ad-to-sales ratio: .041567 (4.16%)
 Top Spender for RTB

Industry
Ad/Sales Ratio
%
Consumer
products
6.6
Communication
Services
3.5
Health Care
3.2
Non-Health
Care Services
2.9
Real Estate/
Construction
2.6
Transportation/T
ravel
1.9
Based on 2010 Data
from: Schonfeld
Forescasts
Sprint- Ad-to-Sales Comparison


2012: Again Spent $1.4 Billion
Mergent Online Statistics (2012)
Wireless Provider
Total Revenue
(Millions)
Advertising
(Millions)
Ad-to-Sales Ratio
(%)
Verizon
Communications
$115,846
2,381
2.06
AT&T Inc.
$127,434
2,910
2.28
Sprint Nextel Corp.
$35,345
1,400
3.96
Industry Average
$74, 250
1,720
2.33


Indicative of high advertising elasticity
Prisoner’s Dilemma
Advertising Strategy



“Truly Unlimited” data plans
“Say No To Sharing” and “Say Yes To Sprint”
“All. Together. Now”
 Random Acts of Togetherness
Emotional Appeal
Emotional Appeal

Sprint “Drive First” Application
Humor Appeal
• Kevin Durant: streaming video
• School play: unlimited downloading
• Family Meeting: “Say No To Sharing”
Informative Advertising
Comparative Advertising
Combative Advertising
Sprint Commercial - Charts
Raw Data: Survey


Conducted a survey with the following questions:
Who is your Wireless Service Provider?
•




Verizon, Sprint, AT&T, T-Mobile, Other
Have you ever changed Service Providers? Yes/No
If yes, from:
To:
Why did you choose your service provider?
•
•
•
•
•
Price
Products
Coverage
Data Speeds
Brand Name
Overall Provider Results
Wireless Service Precentage Breakdown
Service Providers
Other
T-Mobile
AT&T
Sprint
Verizon
0%
10%
20%
30%
40%
Percentage of Consumers Surveyed
50%
60%
70%
Relationship Between Service
Provider and Perceived Qualities
Brand Name
Data Speeds
Qualities
Other
Coverage
Sprint
AT&T
Product
Verizon Costumers
Price
0%
20%
40%
Percentage of Consumers Surveyed
60%
Raw Data Analysis

Google Trend Comparison
Raw Data Analysis

Google Trend Comparison
Industry Trends
Average Spend On 30Second Ad
SUN
$ 12,838.61
THU
$
9,549.91
MON
$
8,894.84
WED
$
8,303.24
TUE
$
7,786.25
SAT
$
6,209.95
FRI
$
5,342.25
Percent of Ad Spend Per
Weekday for Industry
Millions
Total DOLS
(Millions)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Late Fringe
Top 5 Day Parts for Ad Spend:
Industry
Overnight
Prime
Day Part
Sunday
Afternoon
Sunday Early
Fringe 1
Primetime accounts for 62% of advertising spend and
only 24.35% of ad placements, according to 2011 data
Raw Data – Primetime
Dollars Spent (Millions $)
Total Primetime Ad Spend Across
Carriers
700
600
500
400
300
200
100
0
AT&T
Verizon
Sprint
Prime
T-Mobile
Program Type
Sprint
SOAP
OPERA
5%
AUTO
RACING
12%
SLICE-OFLIFE
25%
DRAMA/AD
VENTURE
21%
PROFESSI
ONAL
FOOTBALL
- GAME
31%
SITUATION
COMEDY
11%
AT&T
SITUATION
COMEDY
19%
Ad Spend Allocation to Program
Type (Aggregate)
SLICEOFLIFE
34%
Verizon
DRAMA/A
DVENTUR
E
23%
SLICEOF-LIFE
29%
SITUATIO
N
COMEDY
16%
DRAMA/ADV
ENTURE
26%
FEATURE
FILM
PROFESSIO
9%
NAL
FOOTBALL GAME
PROFESS
IONAL
FOOTBAL
L - GAME
27%
Raw Data – Programs
Top 5 Programs Per Carrier
Sum of DOLS
Rank
Verizon
X FACTOR-FOX
1
NBC SUNDAY NIGHT FTBLL
2
AMERICAN IDOL-FOX
3
GLEE-FOX
4
AFC FOOTBALL GM-2
5
AT&T
AMERICAN IDOL-FOX
1
DANCING WITH THE STARS
2
NFC FOOTBALL GAME 2
3
GLEE-FOX
4
BIG BANG THEORY-CBS
5
Sprint
NBC SUNDAY NIGHT FTBLL
1
AFC FOOTBALL GM-2
2
AFC FOOTBALL GM 1
3
NFC FOOTBALL GAME 2
4
AFC FOOTBALL GAME-CBS
5
Consistent with
comparative
advertising of
Verizon & AT&T
 Sprint’s sports
program focus

 Explain high ad-
to-sales ratio?
AT&T
Address your network issues– don’t let Verizon
use “network reliability” against you.
 Use humor to your advantage– translates into a lot
of exposure on social media.
 Move away from the highly conceptual ads– your
customers are very disgruntled when it comes to
billing, customer service, coverage, etc.

 Differentiate on service via persuasive advertising.
Branding as a “lifestyle” company isn’t resonating. Avoid
combative advertising.

Bottom line: focus on the tangibles rather than the
intangibles.
Verizon

Keep emphasizing AT&T’s operational
deficiencies.
 Comparative better than combative
advertising.
 Combative advertisements have the
potential to backfire and don’t appear to
have much affect. No need to take those
risks.

Bottom line: stay the course until AT&T
addresses their technical issues.
Sprint
Continue to highlight low prices and attractive
data plans (although network coverage and
speeds seem to be more important to
customers).
 Try to differentiate on the basis of
responsiveness to customer needs and flexible
contracts.

 Customers of AT&T and Verizon complain about rigid
contracts, hidden fees, and overall unresponsiveness.

Bottom line: Utilize persuasive and comparative
advertising strategies to give disgruntled AT&T
and Verizon users a competitive third option.
Industry Outlook

IBIS World estimates
that revenue growth will
be 4.5% from 20132019
 Expanding demand for
wireless data services
(LTE, WiMax)
 Decrease dependence on
landlines


Outsourcing less
technical positions will
increase profitability
Price of semiconductors
(decreasing by1.9%
annually) will decrease
input prices
Key Statistics
Key Statistics
Stock Price
53.46
37.30
7.12
152.96B
202.28B
21.45B
2.86B
5.42B
$3.01B
P/E Ratio
133.98
28.8
N/A
Net Income
$1.14B
$7.38B
($4.11B)
0.40
1.30
-1.37
4.20%
-1.50%
0.70%
PEG Ratio
2.06
2.76
N/A
Beta
0.34
0.38
0.8
$200.19B
$271.12B
$38.18B
$31.52B
$28.82B
$7.20B
EV/EBITDA
6.35X
9.41x
5.30x
EV/Revenue
1.71x
2.13x
1.08x
Market Capitalization
Shares Outstanding
Earnings Per Share
Revenue Growth (QTR)
Enterprise Value
EBITDA
Sprint Buyout?




SoftBank made a $20B tender offer in October
2012
DISH Network made a $25.5 billion offer in
April 2013
Bidding war expected
Benefits of DISH’s tentative acquisition of
Sprint
 55 million subscribers
 Product Scope
○ Video, high-speed internet and voice service
 Ownership stake in Clearwire
 Control of largest portfolio of spectrum
Spectrum Distribution
Spectrum:
corresponds to the
frequency (rate of
oscillation) of radio
waves. Increases the
width of cellular
channels.
Firms
Questions?